What is a zero coupon
bond? A zero-coupon bond is bought at a discount to
its face value. A zero-coupon bond does not make any interest payments for
the life of the bond. At maturity, the investor receives the face value of
the bond. The difference between the face value of the bond and the
discounted price represents the interest that is received. There are
certain tax implications. Every year, a specific amount of interest must
be reported on your tax form as income even though it was never received.
This is known as phantom income.